Stocks and Bonds Dip and Then Rip After Strong U.S. Jobs Report

Also 30-year T-bond, gold, natural gas and Japanese yen futures

1. S&P 500 E-mini futures (/ES): -0.39%
2. 30-year T-bond futures (/ZB): -1.22%
3. Gold futures (/GC): -0.64%
4. Natural gas futures (/NG): -3.90%
5. Japanese yen futures (/6J): -0.69%

The U.S. economy closed out 2023 on solid footing. The December U.S. nonfarm payrolls report (NFP) revealed a headline gain of 216,000 vs. the consensus forecast of 170,000. The household employment survey showed that the unemployment rate (U3) held at 3.7%, while wages increased by 4.1% year over year vs. the expected 3.9%.

But not all aspects of the jobs data were good. Workers reported 683,000 fewer jobs, and the labor force participation rate dropped to 62.5% from 62.8%. The composition of job holders also changed dramatically: full-time workers lost 1.5 million jobs, while part-time workers added 762,000.

Despite a less-than-pristine report, the U.S. labor market remains in fairly good shape. According to the Atlanta Federal Reserve Jobs Calculator, the US economy needs to add only 52,000 jobs per month through 2024 to keep the unemployment rate (U3) at 4.1% or lower, which is where the Federal Reserve believes the unemployment rate will be by the end of the year.

Overall, the December U.S. jobs report catalyzed a classic reaction in the markets, whereby stocks and bonds initially sold-off on the headline figures, only to rally back to and through their pre-release levels; this is why we often say “don’t trust the first move on jobs day.”

Equity markets haven’t been kind to investors to start 2024 and the S&P 500 is no exception, with futures (/ESH4) down nearly 2% this week. However, prices are holding up rather well considering the move in bonds and the immediate reaction following the jobs report. It looks las though we may not get a cut in March from the Federal Reserve but considering this week’s move, traders may decide to hit the buy button going into next week in the hopes that markets will remain optimistic enough on the Fed’s path to support equity prices.

Treasuries are responding to the better-than-expected December jobs report. Yields are on the rise across the curve, especially on the long end. 30-year T-bond futures (/ZBH4) posting a loss of about 0.75% ahead of Wall Street’s opening bell, adding about 19 basis points (bps)to the underlying’s yield. While bonds remain well above lows posted back in October and November, the past week’s action has sent a chill across markets. Swap traders are only pricing in 12 bps of cuts at the March Federal Open Market Committee (FOMC) meeting.

Gold prices (/GCG4) are holding up surprisingly well after this morning’s hot NFP report, which pushed bond yields higher—something that typically weighs on gold. The metal remains in a bullish technical stance, although prices are off recent highs. Ongoing tensions across the Middle East may help to support precious metals even if bond yields continue to rise.

U.S. natural gas futures (/NGG4) are trimming weekly gains despite European prices rising overnight as weather forecasts remain on the colder side, increasing the demand outlook. Yesterday saw the U.S. Energy Information Administration (EIA) report a 14 billion cubic feet (bcf) withdraw for the week ending Dec. 29, missing analysts’ expectations for –40 bcf and lighter than the prior week’s 87 bcf draw. With stockpiles 399 bcf above the five-year average—according to the EIA—there was only limited upside for the rally to continue.

2024 was supposed to be a great year for the yen, but this week is set to be one of the worst for the Japanese currency since 2016. Japanese yen futures (/6JH4) are down about 0.5% this morning to put the weekly loss north of 3%. The recent earthquake in Japan has complicated the Bank of Japan’s path to tightening policy and this morning’s jobs report has done the same to the Fed’s dovish shift.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater 

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.